Consumer Sentiment Rises in June, Revealing Cautious Optimism

Consumer confidence rose unexpectedly to 75.5 in June (preliminary) -- its highest level in 30 months -- according to the Reuters/University of Michigan index. This news, combined with a May increase in China's exports, helped to offset lingering concerns about European debt and falling U.S. retail sales figures.

A Bloomberg survey had expected consumer sentiment to rise to 74 in June (preliminary). The index was at 73.6 in May and 72.2 in April.

Further, June's preliminary reading may help resolve a roughly five-month battle between the economic bulls and bears, during which consumer sentiment has basically flat-lined.

The bears argue that fiscal problems in Europe's debt-plagued countries and a sub-par start to U.S. job growth during the initial stages of the expansion point to softening GDP growth in the second half of 2010 -- possibly a double-dip recession.

The bulls argue, however, that although consumer sentiment has meandered recently, the uptrend remains intact, confirming a U.S. expansion that's being propelled by exports, better-than-expected corporate earnings, a rebound in manufacturing, and low inflation.

June Reading: Modest Win For Bulls

Although investors should keep in mind that today's June sentiment reading is preliminary -- a final reading will be released in a few weeks -- the initial survey's components also support the bulls' argument.

In June, the survey's consumer expectations component rose to 70.7 from 68.8 in May, while the current economic conditions component rose to 82.9 from 81.0, Reuters reported Friday.
Consumer Sentiment: A Telling Stat

To say that there's a lot riding on consumer sentiment would be an understatement. That's because consumer attitudes are correlated with consumer spending. In general, rising consumer sentiment leads to increases in consumer spending, or the maintenance of a level of spending; falling consumer sentiment, the reverse. And historically, consumer spending has accounted for 65% to 70% of U.S. GDP, although economists caution that the percentage may dip amid tighter budgets and if the "frugal consumer" trend continues in the post-financial crisis era.

In sum, June's preliminary rise in consumer sentiment was a qualified win for the bulls. Consumers are slightly more confident now than they were at the start of the year, but they remain guarded. They're not convinced that the recovery is strong enough yet to support further, large spending or improve their personal financial situation.